Global coking coal price forecast (January 2015)

This year, Metal Expert Consulting continues to publish open quarterly reports to share its understanding of the coking coal market development in a medium- and long term and compare it with the consensus forecast of investment companies and analysts.

As stated in the October report, in 2014 the global market for coking coal demonstrated an extremely low volatility as spot prices for hard coals stayed within $110-115/t FOB Australia (contract prices were $5-10/t higher). In Q4 the situation remained unchanged as buyers could not achieve prices below $110/t FOB.

Comparison of coking coal price forecast accuracy of Metal Expert Consulting and industry analysts over the recent year

Q1 14

Q2 14

Q3 14

Q4 14

Q 1 15

Q2 15

Q3 15

Q4 15

Fact

123

113

113

112

-

-

-

-

Consensus forecast (investment banks) – April 14

-

149

153

154

158

159

162

162

Metal Expert Consulting – April 14

-

130

141

133

120

143

126

128

Consensus forecast (investment banks) – July 14

-

-

127

132

141

143

144

146

Metal Expert Consulting – July 14

-

-

120

128

143

131

134

125

Consensus forecast (investment banks) – October 14

-

-

-

120

127

128

132

134

Metal Expert Consulting – October 14

-

-

-

112

115

122

128

128

Now the global market for coking coal is controversial. On the one hand, current prices are below the “crisis” lows of mid-2009 somewhere at the level of early 2007, leaving no room for decrease. On the other hand, the slowdown of global economy favours further drop of prices for oil, raw materials and steel products, which depresses demand for coking coal and brings down its prices amid oversupply.

As of the beginning of 2015, investment banks had no common opinion as to the global coking coal market development. The most pessimistic outlook as to prices belongs to Citigroup and Commonwealth Bank (equal or close to the minimum in the table below), who forecast spot prices to remain at the current level throughout 2015. Forecasts of Macquarie Bank, CIMB Group, Wilson HTM and Investec are the most optimistic (equal or close to the maximum in the table below), expecting the prices to start recovering since the beginning of 2015. To prepare a consensus-forecast, Metal Expert has not considered the investment banks’ forecast published prior to December 2014).

Note: To get the forecasts, all available prices have been adjusted to a common benchmark basis – the FOB Australia price for hard coking coal.

Metal Expert Consulting’s methodology of forecasting global coking coal prices is based on mixed forecasting methods and includes models of non-linear dynamics, demand and supply balance in the global coal market, and estimates of key suppliers’ costs.

The Metal Expert Consulting’s quarterly forecast until end-2015 is based onthe Company’s internal methodologies with the use of non-linear dynamics methods. We believe that the market for coking coal still has a room for prices to go down to reach $108/t by the end of Q2. Most likely, this will be the bottom price level followed by the recovery (to $112/t by the end of the year).

Considering the recent global macroeconomics and market trends, we, like most investment banks, have updated our medium- and long term forecast of coking coal prices. In the long-term forecast, we have assumed that production costs of existing coking coal suppliers are likely to add 2-3% per year due to inflation, rising labour and equipment expenses, electricity and fuel costs, possible increase in royalties and severance tax, etc. Meanwhile, the new coking coal producers’ (with lower than average production costs) entering the market, tighter competition and lowering profitability of key suppliers will restrain the increase in production costs and bring the average annual prices down to $120-125/t in the long-term outlook. This estimate is based on the expected production costs plus the minimal possible profitability (at 30% for least efficient suppliers placed to the right on production cost curve or at 50% of the average production costs).

The graph below shows comparison of Metal Expert Consulting’s renewed export price forecast for Australian hard coking coal with the prices that investment and industry analysts expect (adjusted to the same basis). The Metal Expert Consulting’s forecast is more pessimistic than the minimal forecast of investment banks.